Wednesday, April 13, 2016

The Millennial Moment and the global crisis

It’s
a trite saying but a profound one all the same: “History always repeats.” We’ve
all heard this bromide countless times, yet how many of us have truly pondered
its significance?

The
truism that history tends to repeat itself over time is the basis of the
cyclical view of human affairs as applied to the financial market. Cycle
investors believe that by studying past episodes of a similar character they
can divine the outcome of currents events. It’s
not surprising then that the cyclists among us have turned their attention
toward the global financial market slowdown and tepid pace of the U.S. economy
recovery.

When
cycle analysts examine current financial and economic affairs they can see
obvious parallels between the Depression Era of the 1930s leading up to World
War II. They
see the increasingly interconnectedness of the world’s industrialized countries
and the threat posed by China’s economic slowdown. More
and more, even central bankers and technocrats are worried about the
possibility of an economic slump that is truly global in nature.

Christine
Lagarde, managing director of the International Monetary Fund, made clear the
IMF is fully aware of the danger posed by the global slowdown. In a recent speech she said:

“The good news is that the recovery continues; we have growth; we are not
in a crisis. The not-so-good news is
that the recovery remains too slow, too fragile, and risks to its durability
are increasing. Certainly, we have made
much progress since the great financial crisis. But because growth has been too low for too
long, too many people are simply not feeling it. This persistent low growth can be
self-reinforcing through negative effects on potential output that can be hard
to reverse. The risk of becoming trapped
in what I have called a ‘new mediocre’ has increased.”

Federal
Reserve Chair Janet Yellen also acknowledged the possibility of spreading
financial market turbulence because of China’s slowing economy. In her latest speech, Yellen stated: “There
is much uncertainty…about how smoothly [China’s] transition will proceed and
about the policy framework in place to manage any financial disruptions that
might accompany it.”

The
fact that the world’s leading central bankers have at least recognized the
danger posed by China’s slowdown will at least make it easier to combat the
problem. The famous investor Laszlo
Birinyi of Birinyi Associates calls it the Cyrano Principle: when the problems
facing financial markets are as obvious as the nose on your face, central
bankers will have a remarkably easy time making the appropriate policy
response.

Yet
as Dr. Ed Yardeni of Yardeni Research has observed, the proposals of Lagarde
and other policy makers toward ending the crisis mainly involve increasing the
role of government. Yardeni pointed out
that there was no mention in Lagarde’s speech of supply-side measures like
cutting taxes and reducing government regulations. She apparently believes that more government
can solve the problem. But as Yardeni
wryly observed, “Too much government…got us into this mess in the first place.”

Central
banks, led by the Fed, have elevated easy money policies to a sacred doctrine
to maintain a stable financial market.
Most first world countries recognize the importance of a healthy
financial system and the wealth effect of a buoyant stock market. Even Democrat politicians, long opponents of
the Wall Street establishment, have capitulated to the “stock market matters
most” doctrine and have pledged their hearty endorsement of it.

There’s
no denying that in a financial economy like the United States has, juicing the
stock market provides a spillover effect and does lift the economy to some
degree. Monetary stimulus and direct
intervention can only go so far in resuscitating a stagnant economy,
however. When individuals no longer feel
the urge to take risks and are more concerned with protecting their money as
opposed to growing it, there’s not much central banks or governments can do to
change their attitudes. This is where
the cycles come in.

The
cycle which governs (or corresponds with) the combined productive and
consumptive power of an entire era is the 60-year cycle, or K-wave. The K-wave is the primary rhythm which tracks
the inflationary and deflationary tendencies of the economy. More than anything else, it’s a demographic
cycle which follows the waxing and waning of a country’s long-term population
growth. The “waves” of inflation and
deflation which accompany the rise and fall of generations are the results of
human endeavor in the aggregate. When a
generation is both large and young, its upside potential as producers and
consumers is very great and consequently it gives birth to a swelling K-wave. This is what ultimately creates inflation,
along with a rising level of productivity and standard of living for everyone.

By
contrast, when a nation’s population begins aging and loses its vigor, the
resulting fall of the K-wave creates deflationary undercurrents, if not
outright deflation. The falling K-wave
is characterized by introversion and individualism. People are more afraid of taking risks in a
falling K-wave than they are in a rising wave; they’re also more likely to save
money than spend and invest it.

Beginning
around the turn of the Millennium it was evident that the U.S. was in the
contracting phase of the K-wave. Falling
wages and interest rates and declining investment activity were symptomatic of
this contraction. The older generation
was leaving its prime productive years and entering the winter season of
life. Among corporations, most of which
are led by the older generation, R&D and capital investment spending has
been in decline for years. This was yet
another sign that the contractionary impulse of the long-wave was making its
presence felt.

Skeptics
of the long-wave cycle ask how they can know when the long-wave has
reversed. The answer is found in
demographics. When a teeming new
generation is on the cusp of their prime productive years, it’s only a matter
of time before the K-wave turns up again and inflation returns.

There’s
an old saying that “youth must be served.”
Each generation feels entitled to a good time, and they eventually will
go out of their way to ensure its arrival.
The theory of human endeavor rhythms states that a rising generation,
full of energy and ambition, will by its combined productive powers create
technologies and innovations which are unique to them. This outpouring of creative energy produces
the corresponding need for capital. This
is where the stock market comes in and it explains why each generational
long-wave is accompanied by a super bull market in equities.

Each
American generation of the last 120 years has had its own Super Cycle bull
market. The G.I. Generation had the
Roaring Twenties. The Silent Generation
had the super bull market of the 1950s and ‘60s. The Baby Boomers experienced the magnificent
long-wave boom of the 1980s and ‘90s.
Generation X had the powerful but abbreviated housing bubble/bull market
of the 2000s.

The
Millennial generation is the next in line to be served. Born between 1981 and 2000, the Millennials
recently surpassed the Baby Boomers as America’s largest generation by
numbers. They are by far the most
educated and tech-savvy generation in America’s history and they have the
potential to create an economic super boom rivaling the long-wave boom created
by the Baby Boomers.

Since
the turn of the millennium the U.S. has increasingly had to shoulder the burden
of the global economy on its own. No
longer can we take for granted synchronized long-wave cycles among the
developed nations as we did in the 1980s and ‘90s. Japan and many European countries are in the
midst of a demographic tsunami, while China is about to enter its own version
of aging demographic based on its disastrous one-child policy. In the coming decades it will be the United
States that will reaffirm its role as the premier power in the world. The impetus behind this leadership,
increasingly, will be Millennial in composition.

Millennials
were among the hardest hit by the Great Recession and many of them spent
several years living in their parent’s basements well into their early adult
years because of the slack economy. They
are unique among the living generations in that they have a far more jaded view
of personal debt than their predecessors.
This will give them an edge as they gradually find meaningful work and
begin accumulating savings and looking to invest their earnings.

The
doom-and-gloomers would have us believe that since the credit crash and
Recession, the U.S. has entered a period of terminal decline. They further preach that with the aging of
the Baby Boomer generation, our country’s best days are behind it. What they’ve failed to realize is that
Millennials will be gradually transitioning into the economy to pick up the
slack left by the exiting Boomers.
Indeed, this younger generation is poised to deliver a much needed
stimulus to the economy once the long-wave generational cycle kicks into full
gear.

The
Millennial generation is unique among American generations of the last century
in that it has had to delay the gratification of its consumerist tendencies
just as they’ve entered their prime years.
This will inevitably lead to an explosive release of pent-up energy when
the time arrives for them to be served.
When the Millennial Moment finally arrives, in other words, it will be
huge.